GOT EQUITY Question Deserves A Hard Think Before You Act

In a recent news story in a southwest Florida paper, there was the headline, "Got Equity?" The premise was if you have equity in your home you can tap into that for all number of reasons.

My thought is, not so fast. It depends on why you want, or need, that money. Why is this a commercial/investment real estate story? You'll see in a minute.

A little history. One of the reasons the U.S. found itself in an economic quagmire caused by the real estate downturn was that hundreds of thousands of Americans, possibly even millions, used their homes like an ATM machine. Prodded on by greed and unsavory finance officers, people repeatedly re-financed their home mortgages, took out cash from equity that had built up significantly, then took trips, bought "stuff,"used it for extra little things.

Many people just walked away from those homes after taking out tens of thousands of dollars. For any number of reasons they had on way to pay it back -- they either lost a job, or had to undergo a pay cut, or perhaps had a need for a move but found they owed far more than the home was worth because the neighborhood had declined in value.

The combination of low home equity rates, combined with skyrocketing home values, is fueling this trend.

In the November newspaper story, when the question was asked "Got Equity," and "should you cash in on rising home values," the answer from several individuals was, "heck yes, why not?"

Well, for all the reasons above I would say, NOT.  Just be careful and think it through. If you are going to plow the monies back into your home for physical improvements, then I would say yes. If you are going to consolidate some personal debt you have, or pay off some debt, that again is a qualified yes, from my perspective.

(Please note I am not dispensing financial or legal advice, just sharing my opinion).

But cashing in on rising home values, like here in Collier and Lee County, Florida, where home sale prices are substantially on the rise, is something worth thinking about. While it is positive news for the real estate industry as well as the broader economy, I still worry that individuals will "blow" the funds rather than put them to productive use.

Another alternative (and yes here comes the suggestion...you know I would work this in, right?), if you feel you just absolutely have to pull money out, is to take equity out of the home, conservatively, and use it to invest in commercial/investment real estate. I have worked with a number of individuals over the years who have done just this. In essence, the money they pull out of their home is leveraged into an investment where a tenant(s, whether it be a commercial building, or small retail center, or multifamily, pays the mortgage via their monthly lease payments. HELOCs can also be used to invest in small rental homes, if that is the sandbox you want to play in.

Interestingly, according to RealtyTrac, southwest Floridians are taking out home equity loans at a rate that is double the U.S. national average. In Collier County, Florida, which includes Naples and Marco Island, among other cities and villages,  in the 12 months ending in June 2014 the number of HELOCs (home equity line of credit) was up 51 percent compared with the same period a year earlier. In Lee County (Fort Myers, Estero, Bonita Springs, et al) HELOC origination was up 55 percent. Nationally, HELOC origination was up 21 percent for the period, according to RealtyTrac.

My bottom line is this. If you are refinancing "because you can," ask yourself "should you?" And most importantly, "Why?"  And think long and hard about whether a 10-day cruise is really worth pulling money out, or whether it makes more sense to invest into something where you can take profits, plow them into your own personal pension plan, and fund your cruise from that nestegg.

Just be careful if you get "home-equity-itus."

Did You Know?

Did You Know . . . ?

A dollar from cash flow is generally better than a dollar from a job because the former is not subject to social security tax or self employment tax, AND it can be sheltered from income tax.

The 1031 Exchange -- Deferring A 'Voluntary' Tax

I had a question from a client I am working with who owns commercial property in Florida. He asked, "why do a 1031 exchange?"

It's simple. I replied that in an exchange you are moving 100 percent of your net equity, tax free. His response was that he felt the tax was merely deferred.

That's true. However, if done correctly, it truly is tax free. The capital gain is carried to the next property without being taxed. Further, capital gain taxes are really voluntary taxes when you really drill down into the meat of the matter.

Think about it . . . the gain is not taxed unless the owner volunteers, by selling the property! Instead of selling, many shrewd investors continue to exchange until they die -- or their LLCs continue to exchange after their death -- and the cumulative gains are forgiven because of stepped up basis rules.

Bottom line -- consult a GOOD tax attorney. IR 1031s are one of the most powerful ways under our tax code to build wealth. But there is another problem. 1031s are much misunderstood by attorneys, accountants and even real estate agents.

Do your homework. Find a CRE agent and tax attorney who understands tax-deferred exchanges.

New Flag, Same High Quality Results

The brand may have changed, but the quality remains among the highest in the industry.

Prudential Commercial Real Estate is now Berkshire Hathaway HS COMMERCIAL. Yes, the home office-dictated logo has the word "home services" in it. But pay no attention; it is entirely irrelevant to my team across Ohio and Kentucky.

While many full brokerages/franchises have 5-7 percent of their agents devoted solely to commercial real estate, more than 20 percent of our agents in Greater Cincinnati, Dayton, Central Ohio (Columbus), northwest Ohio, greater Cleveland, and Lexington, Ky. are full-time commercial/investment real estate agents, devoted to proving leading edge CRE solutions 24 hours a day, 7 days a week. Well, check that . . . some of my team play golf on the weekend. Nevertheless, I have the resources necessary to assist you with corporate and institutional commercial acquisition and disposition, cap rate and market analysis, re-development projects, and much more. Anywhere in the Buckeye State. Part of the Ohio-Florida connection? I can help you in both states personally.

In fact, the Berkshire Hathaway HS COMMERCIAL network is growing exponentially across the USA. Let me help you find the commercial real estate solution to the problem that keeps you awake at night.

Veterans.
Seasoned.
Experts.

Berkshire Hathaway HS COMMERCIAL:   Knowledge . . . Expertise . . . Results.

It's Coming . . .

It won't be long before you are reading the words ....

     "Nationally Respected . . . Globally Recognized."

FORBES: Columbus Is No. 1 City For 'Opportunity'

Forbes magazine has just announced that Columbus, Ohio is Numero Uno in the USA for "opportunity." They looked at cities across the nation and gave kudos in a number of categories.

A pretty interesting story!  Pass it on.

No Reason In Particular, Except This Is Just So Cool

Something fun for a Monday that has nothing to do with investment real estate. Sometimes, you just have to step back and say to yourself, "this is just flipping cool!"

Right?

Oops

So many red flags ignored here it isn't funny. But it is kind of funny. This never should have happened, from the owner, to the initial surveyor, to any real estate agents or title companies involved. Add in any park employees who never said "boo" that a house large enough that no one could ignore it was being built on this location? And this was built by a developer? Really?

The lesson here is thus: Partner with an experience Commercial RE agent who understands zoning, and has a vast number of reliable managed resources to whom to turn to make sure a client in a development situation has the data and knowledge they need ahead of time to stay out of trouble.

Toss this under the heading "Check It Out," even it you think everything is alright. Sort of like someone handing you a sidearm and telling you its unloaded. Firearms Etiquette -- and common sense safety -- says check it yourself anyway.

Wow.

Three Words You Almost Never See Together: Shipping; Container; Home

Back in 2011, I posted about unusual offices and housing being built from used shipping containers.

You know, the rectangular metal boxes used to ship consumer goods around the world. Sometimes by rail, sometimes by ocean freighter. Stacked high on their journeys to different ports of our world, these containers are finding many new applications and they wear out or no longer meet specs of the shipping industry.

Which gives resourceful builders, and creative investors, an alternative to traditional stick, brick and mortar construction.

Small apartment building constructed with used shipping containers

As Americans are even more enamored with recycling than ever before, I present you an updated look at "shipping container living." I'll be posting soon about updates in shipping container office and commercial development.

You will be surprised!

Without question, I would personally consider this approach as a possible alternative to a tiny house from a kit, or a stick built cottage.

Market/Mercado: Translation? Success When You Know Your Market

"Built in 1962, Seminary South was the first mall in Fort Worth, Texas and, by all accounts, the archetypal American shopping center. At its peak, it was home to a Sears, a JCPenney and a Dillard's. There was a bowling alley, a movie theater and a space for the Fort Worth Opera to practice. Families took their children on weekends, and neighbors mingled."

We're all familiar with this model of shopping center. THE model for success for decades, I will add a few more types of businesses. Before I became licensed investment agent, I was a working journalist covering business news. In talks with developer after developer back in the 1970s and 1980s, the "list" I heard was nearly the same. You need:

- An anchor store or two
- A barbershop
- A bowling alley
- And you MUST have a liquor store

The perfect mix, one long-time developer told me repeatedly.

But U.S. consumer preferences are changing, as our demographics are changing. One of the trends across many American markets is a retail rebirth of older -- and even newer centers -- whose owners are tapping into the most powerful new demographic in the U.S. economy: Hispanic consumers.

Just how important is this market segment? One in six Americans is Hispanic, up from one in 16 in 1980, according to recent Census data. The group is projected to have an annual buying power of $1.6 trillion by 2018 -- more than any other minority group -- according to the University of Georgia. Companies from fast food chains to cell phone carriers are pouring billions of dollars into marketing to this demographic, primarily by airing Spanish-language commercials.

A fantastic story in the April 28 edition of Time magazine, headlined Mercado Of America, takes a look at how traditional malls in the United States are struggling, and how one developer is remaking them to meet the tastes of the new American consumer.

For seasoned investors, or new owners, knowing what your marketplace desires is key. Not necessarily what it demands, but what it desires. There is a difference. There is no one cookie cutter approach to the "American Experience" anymore, particularly when it comes to retail. Malls are making them entertaining. They are becoming destinations, rather than the place you "need" to stop by after work. No longer relegated to a category of place to merely explore, consumers in some of these "repurposed" shopping centers come to be entertained, once again mingle with family and neighbors, and to shop.

Says Jose de Jeusus Legaspi, a developer who is remaking shopping centers across the southern U.S., you have go "all in" and not just adopt a latin accent. He started in 2004 looking at dilapidated malls as possible investments. Today he owns nine shopping centers. Using government revitalization grants and his own investment, his refurbished malls attract consumers with considerable buying power. And his mix of tenants includes retailers that cater heavily to a targeted market.

To be succinct, shopping malls that include something for the fast growing economically powerful Hispanic marketplace -- even working to attract family members who aren't there to shop, are thriving and growing in number.

Interested in owning a retail center, or growing your retail portfolio? Successful retail recipes increasingly include a south of the border flavor. Take note.

Happy Mother's Day!

To all the Moms out there:

Hoping you had a wonderful weekend with family. Plus, I had to share an oldie, but goodie video of the love of two sons for their mother. Truly a funny look at the journey toward the surprise photo for Mom.

Happy Mother's Day!

Humbled Again -- OMHFV Called Me Today . . .

I am humbled and flattered once more to have been asked to emcee to upcoming induction ceremony of the Ohio Military Hall of Fame for Valor.

In May, some 20 individuals will be recognized for heroism under fire during their time with the U.S. Armed Forces during a ceremony that takes place at the Ohio Statehouse in Columbus.

The OMHFV Board bends over backwards to thank me for my sacrifice in giving them a hand. And all I can think is how humbled I am to be ask to lead their program, which recognizes sacrifice by Ohio men and women in the American armed services.

More to come . . .

REPORT: Investors Looking To Create Value, Not Buy Into Unsustainably Inflated Developments

BONITA SPRINGS, Fla. -- If research coming out of southwest Florida is any indicator, and I am hoping it is, the resurging commercial real estate sector is finally jolting back to "reality."

Panelists last week at the Urban Land Institute's 2014 Market Outlook Program unanimously concluded that investors are looking for improvements in fundamentals and operations to drive returns.

Said Dean Schwanke, ULI senior vice president, "Capital will be going wide into more markets, taking on more risk and looking for yield." Further, he noted that the southwest Florida marketplace is appealing because investors are turning away from buying big buildings in primary markets. Instead they are looking for new opportunities in secondary markets.

"Money will be put into creating things instead of buying existing things at ridiculously high prices," he said. Which means all eyes will be on real estate, Schwanke said, because it is a stable investment compared to the volatile stock market, and currently has better yields than the bond market. Multifamily rents are expected to rise over the next five years while vacancy rates decline.

Those last couple of statistics are unique to the region, as many projects were finished or near completion, leaving a huge number of completed -- but empty -- multifamily housing projects, or projects that ranged from unfinished holes in the ground, to a few foundation walls up, to walls, roof and shell complete, but unfinished interiors. All of which sat for years as capital left the region, and developers scraped by to hang on, or went out of business.

The best news from the outlook meeting bear repeating -- and I hope this applies not only here but in other markets as well. That investors are looking to create value, rather than buy existing projects at inflated prices.

Many sellers now with unrealistic values/prices placed on their properties are going to be disappointed. Not all, but many of those properties now for sale just don't make sense when you perform even a rudimentary analysis. When our group looks at any property, whether because we have been asked by a potential buyer, or even when we are asked to list a commercial/investment opportunity for sale, the same analyses are conducted. And appropriate recommendations given to the seller.

I don't like dealing in smoke and mirrors. Must of CRE a decade ago, particularly in this region was just that.

Another interesting note coming out of the panel discussion is a problem facing southwest Forida. Many construction workers have moved to booming energy-producing states like Texas and North Dakota, and so have little incentive to return. That translates to higher construction costs, which -- along with higher land costs -- will raise the cost of new housing.

Further, industrial spaces are likely to be redone to serve the demands of online retailers, while offices may shrink and be reconfigured to allow for more collaboration among workers. And while multifamily projects have been eclipsing other commercial sectors, industrial, hotel and retail space should be improving, but in untraditional ways.

Finally, finding land is a challenge in southwest Florida because many of the most desireable parcels have already been tied up by national homebuilders. Infill assemblages will become more common, the panelists agreed.

The most surprising comment I heard? One panelist who said a new mixed-use community in downtown Naples was expected to draw the usual community opposition. It never came. The reason? A belief that the public, across the U.S., is more open to development now after what everyone's been through with the Great Recession.

Here's to realistic, and economically positive, improvements in 2014.

Campus Student Housing Continues To Command High Market Rates

One of the hottest segments of multifamily housing is student housing, an area I have worked in since my earliest days in commercial/investment brokerage. Considered virtually recession-proof, I have watched student housing projects continue to climb in value.

There are few financial setbacks, perhaps only if an owner lets a property become dilapidated or obsolete. Typically, however, student housing annually remains at capacity occupancies because:

1) The economy is bad, therefore students stay in school longer, going back for more degrees or degree work to avoid going into a tough jobs market where salaries are stifled or devolving, or

2) The economy is good, prompting students get in and out of college quickly, moving on to solid job opportunities. Right behind them are younger students wanting to get their education quickly, and grab their own brass ring ASAP.

Student housing is not simply targeted, market-rate apartments. Any apartment developer, or new investor, thinking of jumping into this arena must come to understand that not only is the "lingo" different (we talk about beds, and not units), but designing for people who you know will move out after nine months, or for people who will have roommates that they may not even know, is a process that's not only very different, but sometimes has you scratching your head.

It means considering everything from how the common wall between rooms is constructed in order to ensure privacy, to how several individuals share a single pantry. In a new build you have to think about ways you heat hot water, particularly if four people will be getting ready for the day at the same time, each in his or her own bathroom. It's just different. And, that's just in a single unit.

So how do you retrofit, or design, housing for students? The effort can be challenging. Aesthetically, you want it to feel fresh and forward-looking, like the population it serves. The problem: it needs to serve generations of students and a myriad of changes in taste and preference that accompany them from year to year.

It's important that even though you are designing for students, the buildings don't look childish. Today's students are worldlier and more design savvy than ever before. The focus is less-is-more; simple, clean, adaptable, and, ultimately, timeless. Not timeless in the sense of fitting into some historic mold, but timeless in a way that it's not trendy or edgy or filled with the fad of the moment, on the outside that is.

In this way, we borrow a lot from hospitality design. The exteriors, which are not easily changed, are simple and straightforward with a few flourishes that can be changed with the times. On the interior, assume a remodel every few years. This is important. Students are going to wear it out. So the furnishings, technology, paint and interior materials will push boundaries. They can be fun, of-the-moment and offer the latest in connectivity and comfort.

Students go to college to learn, but equally as important is the collegiate "experience." Strive to create an environment for students that allows them to have the best possible social experience in a setting that is safe and still fosters an academic mission. It needs to speak to the students' sense of fun and adventure, but also to the parents' sense of practicality, security and pocketbook.

We want the student amenity spaces to offer a variety of experiences and levels of community. A ground-floor amenity creates the opportunity for the residents to be a part of the larger community and opens the door for that interaction and integration to occur with a visual and physical connection to the street and nearby campus. Fifty years ago, open spaces allowed students to play cards, or watch that new-fangled contraption, the single TV. Today, students' mobile devices are their up-to-the-second connection to the world. So Wi-Fi is a given, and often the large space may include a handful of private nooks to plug in a tablet/surface or laptop, without heading up to their bedroom.

For high-end developments, incorporating a rooftop pool deck is the latest trend, a more private area for the residents and guests, and offers indoor/outdoor spaces for them to gather and form their own community within the building, while still maintaining visual connectivity to the campus. In addition to the pool, the rooftop deck offers lounge spaces, fire pit chat areas, an expansive sun deck and fitness facilities.

Seem a little out there? It's what students are coming to expect in campus-area multifamily housing, particularly with new builds.

Existing student housing, as long as it is regularly updated to reflect students interests and needs, even without a swimming pool, enables investors to keep rents at the high end of the market. Often students come back to the same bedroom/property year after year.

Remember, as an investor, its not about what you think students' need. Its what they want and are willing to pay for.

Big Shout Out To Sister Company -- Berkshire Hathaway Home Services

My firm's two sister residential companies, Prudential One, REALTORS and Prudential Select Properties, have a new name and look . . .

Berkshire Hathaway HomeServices.

It's part of a new brand and emphasis on a new way of looking at residential realty. Prudential Real Estate was purchased by Warren Buffet's Berkshire Hathaway holding company -- the world's most respected company, according to Barron's magazine.

The coolest part of this? This is one of the few of the large successful holding company's affiliates ever to be entrusted with the Berkshire Hathaway name.

Nevertheless, our residential company has offices in Cincinnati, Beavercreek, Dayton, Lima, and Greater Cleveland, and many places in between. In addition to agents in Kentucky, three Berkshire Hathaway HomeServices residential agents work out of my Prudential Commercial Real Estate office in Columbus.

Go Team!